Finance

AT&T Could Weigh Selling DirecTV’s Jewel

Latin America business, while strong, has sagged — and buyers are circling 1/25/2016 8:00 AM Eastern
TakeAway

AT&T may consider selling DirecTV Latin America, a growth business once considered the jewel in the satellite-TV provider’s crown but now battered by foreign-exchange issues and a lack of free cash flow.

Just six months after completing its $48.5 billion merger with DirecTV, AT&T could be looking to sell what was once the satellite-TV provider’s most promising growth engine: DirecTV Latin America. At least two potential bidders seem to be interested.

 

The notion that AT&T could sell the unit — Spain’s Telefónica is willing to pay as much as $10 billion for the assets, reports said, and Liberty Global is also a potential suitor — spotlights a part of the business that has had a spectacular fall from grace in just two short years. As recently as 2013, DirecTV Latin America was touted as the future of the business, responsible for the greatest customer growth and, with an emerging middle class in several countries throughout the region, the source of strong profits for years to come.

 

HAS REGIONAL DOMINANCE

 

When AT&T announced its intention to acquire DirecTV in May 2014, some considered DirecTV Latin America to be the hidden jewel in the deal. With 19.5 million subscribers in Latin and Central America (including its 41% interest in Sky Mexico), DirecTV is the region’s dominant pay TV provider.

 

AT&T touted DirecTV Latin America’s strong market position, the region’s underpenetrated pay TV status and the unit’s fast-growing customer gains.

 

AT&T even sold off its $5 billion stake in Mexican wireless telecom giant American Movil to avoid regulatory entanglements.

 

So what went wrong? Declining economic growth, devalued currencies and slower subscriber gains have weighed heavily.

 

In August, just after AT&T closed on DirecTV, Moffett Nathanson principal and senior analyst Craig Moffett described DirecTV’s Latin American business as “a mess,” saying second-quarter 2015 revenue was down about 6.5% and cash flow declined 21.5% year-over-year. Overall subscriber growth in Latin America had slowed to just 3.1% year-over-year in 2015, and the 167,000 net new subscribers added in Q2 were a deceleration of 69% compared with the year before.

 

The third quarter was even worse, with revenue down 25%, due mainly to changes in foreign-exchange rates. Excluding foreign exchange, revenue was up about 18%.

 

Total subscribers were down about 113,000 in the period, including a loss of 126,000 net customers in Brazil.

 

AT&T and DirecTV have not publicly responded to the speculation, but the telco has dramatically changed its tune on the Latin America market since absorbing DirecTV in July 2015.

 

At the UBS Global Entertainment and Media conference in New York last month, AT&T CEO Randall Stephenson said he would entertain offers for the Latin American business, but wasn’t in a rush to do a deal.

 

Though DirecTV Latin America is generating enough cash to sustain itself, Stephenson said the one-product offering south of the border is “not terribly exciting to us.”

 

The Latin America unit’s lack of free-cash-f low growth has also been a sticking point with AT&T, Pivotal Research Group CEO and senior media and communications analyst Jeff Woldarczak said. He believes the telco is more focused on funding its stock dividend.

 

“They [AT&T] do not seem to have much interest in Latin America, other than Mexico,” Wlodarczak said. “Their main focus seems to be on generating free cash flow to pay the dividend and, I imagine, with the currency situation in Latin America, DirecTV/Sky Latin America is not generating much free cash flow these days.”

 

Currency rates, not fundamentals, appear to be the market’s biggest problem, Wlodarczak said. Stephenson brought that up in December, saying the business units are generating cash, just not as much as they used to given the stronger U.S. dollar.

 

In the past two years, for example, the Brazilian real has lost about half of its value against the U.S. dollar, while the Venezuelan bolivar has fallen 32%.

 

The outlook on the currency-exchange front doesn’t appear particularly good for at least the next couple of years, Wlodarczak said, but pay TV’s longterm outlook is better than that. Multichannel TV in Latin America remains underpenetrated, at around 40%; there is a sizable and growing middle class that will want pay TV; and satellite is well suited to the topography.

 

LONG-TERM ‘NO-BRAINER’

 

“If you can get this asset for a high-single-digit billions price, I imagine it is a long-term no-brainer,” Wlodarczak said.

 

That could be good news for Telefónica, which has about 4.5 million pay TV customers in Argentina, Brazil, Chile, Colombia, Peru and Venezuela on various platforms (IPTV, direct-to-home, CATV, video-on-demand and over-the-top). The telecom firm has said it plans to expand video service into seven additional markets this year, with a goal to become “the first pay TV company in the world in Spanish and Portuguese.”

 

Liberty Global also has made Latin American moves, spinning its assets in the region off last year into tracking stock Liberty Latin America and Caribbean (LiLAC) and agreeing in November to purchase Caribbean telecom company Cable & Wireless in a deal valued at about $5.3 billion.

 

“I think [Liberty Global] would definitely take a look,” Wlodarczak said. “The question is, with their stock currency getting slammed and the weakness in the high-yield markets, could they get a deal done for the entire entity? Telefónica seems like a more likely candidate.”

 

Latin Losses

DirecTV Latin America has been hit hard over the past several quarters by a strong U.S. dollar and declining subscriber growth.

 

                                              Q1 2015                   Q2 2015                    Q3 2015

Revenue. . . . . . . . . . . . . . . . . . $1.64 billion . . . . . $1.68 billion . . . . . $945 million

OPBDA (Loss) . . . . . . . . . . .  . $445 million . . . . . $(715 million). . . . . . . . . . . N/A

Subscriber Gains (Losses) .  . . 219,000 . . . . . . . . 167,000. . . . . . . . . .(113,000)

SOURCE: Company reports

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